Can Crowdfunding Benefit Your Business?
In the ever-evolving landscape of business financing, crowdfunding has emerged as an innovative and compelling option for entrepreneurs and small business owners. Crowdfunding to raise capital involves reaching out to a broad audience, often through online platforms, to secure funding for business ideas, projects, or products. But can it truly benefit your business, and is it a viable option to explore?
Access to easy capital
One of the most apparent advantages of crowdfunding is its potential to provide access to capital that might otherwise be challenging to secure through traditional means. Traditional lenders, such as institutions and venture capitalists, may have stringent requirements or require collateral. On the other hand, crowdfunding enables you to tap into a vast network of individuals willing to contribute to your project for various reasons, including the appeal of your idea or product. “These are donations,” explains Zack Miller, founder of Tearsheet, a company that covers the impact of technology on financial services. “Using rewards-based crowdfunding, you’re raising money for your project or business without selling off an equity stake in your business.”
Market validation and brand building
Crowdfunding platforms often serve as a litmus test for your business idea or product. When individuals pledge their support by making financial contributions, it can serve as validation of your concept’s appeal and market potential. Positive feedback and contributions can give you confidence that your business idea has traction in the market, which can be invaluable when seeking additional funding or scaling your venture.
As such, crowdfunding is more than just a financial transaction — it’s an opportunity to engage with your target audience and build a loyal community around your brand. “You get tens, hundreds, or even thousands of people committed to the success of your campaign — that can be really valuable,” Miller says. This engagement not only helps you raise funds but also fosters a sense of connection and loyalty among your supporters, potentially translating them into long-term customers or advocates for your business.
Pressure to meet goals
Crowdfunding isn’t a source of free money. According to Bankrate contributor Lara Vukelich, “crowdfunding platforms commonly require businesses to return all funds to donors if they don’t meet their fundraising goal” — and as of May 2023, only 40% of campaigns on the crowdfunding platform Kickstarter managed to achieve this. You might therefore invest a lot of time and energy in a campaign that ultimately didn’t raise any money at all.
Even if you do successfully meet your fundraising goal, there is still the pressure of delivering on a project that, potentially, thousands of people invested in. “The clock is ticking, and shipping late (or not at all) could be a public relations and social media disaster for your company,” Miller writes.
Other potential setbacks
There are other potential downsides to crowdfunding your business project. As Vukelich points out, “The process isn’t fast. Many businesses must wait for months for their campaign to be fully funded and then receive their funds.” If you need money sooner, you may be better off applying for a small business loan. Additionally, crowdfunding comes with the potential risk of losing your business to a competitor. Advertising your business idea in its early stages, if not copyrighted or patented, can lead to having it stolen, or getting beaten to the market by an organization with larger resources.
Crowdfunding can be a valuable tool for entrepreneurs and small business owners seeking capital, market validation, community engagement, and brand building. However, it’s not a one-size-fits-all solution, and success requires careful planning, marketing prowess, and a compelling value proposition. Before embarking on a crowdfunding campaign, assess your business needs, understand the various crowdfunding models, and consider the challenges and costs involved.